Nonprofits Don’t Pay Taxes… or Do They?

There are some common misconceptions that relate to the nonprofit world.  One of which is that nonprofits don’t pay taxes.  While on the surface this is true, it is not entirely.

Income Taxes

Nonprofit organizations that have received a tax-exemption from the IRS are exempt from paying income taxes.  However, the entity must have applied for and received approval for exemption from the IRS. 

Unrelated Business Income Taxes

Although nonprofits are exempt from paying income tax they are not exempt from paying unrelated business income taxes.  Income is considered unrelated if all three of the following are met for an activity (1) It is a trade or business.  (2) It is regularly carried on.  (3) It is not substantially related to furthering the exempt purpose of the organization.  It does not matter that the organization is using this income to further its exempt purpose, it matters how it was earned.  If it was earned through an activity considered to be an unrelated business, the organization is liable for taxes. 

Payroll Taxes

Nonprofits that employ individuals must withhold and remit federal and FICA taxes just like any for-profit entity.  They must also pay their share of FICA.  501(c)(3) organizations are exempt from paying federal unemployment taxes but are liable for state unemployment taxes in Indiana.  Nonprofits may choose to be a reimbursable employer for state unemployment in Indiana whereby they reimburse the fund for benefits paid to former employees instead of making regular premium payments.  However, to become a reimbursable employer, the organization must complete a form with the Department of Workforce Development.

Sales Taxes

Nonprofits may be exempt from paying sales tax on certain purchases in Indiana but in order to be exempt, the organization must file an application with the State and file an annual form.  Only certain nonprofit organizations and certain transactions are exempt from sales tax.  Sales tax must be paid on all other purchases.

Property Taxes

Certain property that is owned, occupied and used predominately for charitable, religious, educational or scientific purposes may be exempt from property taxes in Indiana.  However, in order to be exempt, nonprofits must file an exemption when the property is purchased.  If an organization relocates, they must file a new exemption for the property at the new location.  Once they receive the exemption, they still need to file an annual property tax return.

Contributed by: Carrie Minnich, MAcct, CPA | Partner | DWD CPAs & Advisors